Fundraising activities are a substantial source of funds for most nonprofit organizations. Because they invest their revenue back into their programs, nonprofit entities are exempt from paying income tax. However, the Internal Revenue Service maintains strict guidelines regarding fundraising activities that can affect both the nonprofit and the donor. The smaller your nonprofit organization, the less likely you are to have in-house tax expertise and the greater the need to pay attention to your fundraising activities.

Unrelated Business Activities

Nonprofit entities with a 501(c)3 status are generally exempt from paying income tax. However, the IRS maintains an exception to this rule. Nonprofits must pay income tax on income that is unrelated to the organization's purpose, or an "unrelated business activity." The income tax is applied if the nonprofit engages in reoccurring, for-profit activities typical of a business. For example, a fundraising sale of goods that occurs every week could be considered an unrelated business activity. Nonprofits engaging in reoccurring fundraising activities should be careful to keep these events to a minimum; nonprofits can lose their tax exempt status if they dedicate a substantial amount of time to unrelated business activities.

Quid Pro Quos

Some donors give nonprofits money and receive nothing in return. However, a number of fundraising events, like auctions and dinners, involve an exchange of goods. When the donor receives something in exchange for her donation, the IRS refers to it as a "quid pro quo." Nonprofits must be careful to recognize the value of any goods when issuing donor receipts. For example, if a donor bought a $150 ticket and received a meal valued at $30, the nonprofit must state this on the receipt. Generally the difference between the gift and the value is tax deductible, but it's best to refer donors to their tax accountants for any questions.

Gaming Activities

Raffles and bingo are popular ways to generate funds for a good cause. However, donations involved in these activities are generally not tax deductible. The IRS opines that donors are receiving something in return when they make gaming purchases -- the chance to win a prize. Nonprofits can still hold these fundraising activities, but it's best to tip off donors ahead of time. There's also a bit of extra work at tax time: nonprofits must report any participant winnings to the IRS.

Fundraising Expenses

Nonprofits should have a clear understanding of what their fundraising activities cost them. Small nonprofits typically incur expenses that support all areas of their activities. However, the IRS requires nonprofits to report separately expenses for fundraising, programs and management. If you have staff that spend time in all areas and common rent and utilities expense, work with an accountant to create a sensible plan to allocate expenses to each area. If your nonprofit is unsure about how to structure fundraising activities to meet IRS rules, you may also wish to reach out to a tax professional that specializes in nonprofit clients for assistance.